Introductory note: this blog post will be discussing board compensation for worker cooperatives. It does not address other forms of cooperatives (purchasing, marketing, producer, etc.) which may not have the same issues as worker cooperatives regarding board compensation.
When starting a business, among many of the decisions the organization must make is what to pay the people running it, if it all. For example, for a single owner of a sole proprietorship who also operates the business, this can be straight forward – they can pay themselves a salary they choose, and the amount they decide to pay themselves will determine what amount of money is leftover for other purposes (such as business expenses, reinvestment in the business, etc.). But because they are the only owner and operator of the business, the notion of whether this is a prudent decision for the organization as a whole is less keen. This is their business, their decision, and their success or failure. This analysis is more complicated when the business has multiple owner-stakeholders and is managed by a group of individuals like a board of directors. And it gets even more complicated in the context of a cooperative where worker members are typically rewarded based on their patronage with the cooperative. Because paying the board of directors for their service in addition to what they receive as cooperative members would seem to stray from this patronage concept, the topic of compensation for cooperative board members is not as straightforward as it is for a single owner-operator business. In this blog post, we’ll review a recent experience with a client regarding compensation of the board of directors of its cooperative.
In an uncommon scenario earlier this year, we were working with a client to form a cooperative to be owned by a small group of worker-members who wanted to compensate their board of directors based on the business’s profits. In Colorado, a cooperative must have a board of directors – a group of individuals who serve as the governing body of the cooperative. In most cases, the members of the cooperative elect the board of directors and often serve in the board of director roles themselves. The board has legal responsibilities to be loyal to the cooperative, to act with care and honesty, and to operate the cooperative for the benefit of the membership. In smaller cooperatives, rather than a management team, the board generally makes day-to-day operational decisions, while other larger decisions may be reserved for the membership. Board of director compensation is optional – some cooperatives may decide not to compensate their board, while others do. Larger cooperatives tend to have the resources to do so, while smaller cooperatives may forego paying their directors.
Our client’s worker cooperative had a relatively low number of worker-members, and an even smaller board of directors poised to manage the organization. The cooperative wanted to make sure their board of directors (which was composed of members of the cooperative itself) received some sort of compensation for their duty serving the organization. After all, they were acting as the operational management group for the cooperative, in addition to their roles as worker-members. When determining the amount for this compensation, our client’s suggestion was to pay its board of directors on an annual basis an amount equal to a percentage of the cooperative’s profits left over at the end of the year (i.e., with the funds remaining after the cooperative had paid its taxes, operating costs, and any other common operating costs, but before patronage dividends are calculated).
On the surface, this suggestion seemed to represent a profit distribution exclusively for those members serving on the board. Accordingly, this arrangement seemed a little less coop-y than if there was no compensation or fixed compensation, because the members serving as directors would be paid on the basis of the organization’s profits despite their role on the board of directors not being the main responsibilities of the worker members of the cooperative. On the other hand, the directors will be acting as managers so some compensation may be appropriate. In our experience, cooperatives that do pay their directors tend to do so using fixed stipends that are paid on an annual basis or per meeting basis. This approach avoids an inequitable outcome because no matter how much the cooperative made (or didn’t make), the directors would be compensated the same. If, instead, they are paid as a function of the profits of the business, this can conflict with cooperative principle of member economic participation, where money of the cooperative is supposed to be used to benefit members in proportion to their transactions with the cooperative (their patronage) and to support other activities of the cooperative approved by the membership.
Tasked with forming the cooperative with this preference in mind, we prepared the Articles of Organization, Bylaws, Membership Agreements, and founding resolutions, and helped the cooperative integrate a payment structure into these governing documents. Our client initially wanted to prescribe the specific board compensation into their governance documents, including the detailed payment amounts. However, the downside is that any change to that policy must then be reflected with a change to those governance documents. Ultimately, we drafted the Bylaws to permit board compensation, advised the cooperative of the options we typically see cooperatives use – no board compensation, or doing so using a fixed stipend basis (whether per meeting or annually), and advised the cooperative to have the members make this determination at a meeting of the members once the cooperative was up and running. This decision on how to implement and document the director payment mechanism is ultimately up to the cooperative. The key point is that the director compensation policy should be ratified by the members of the cooperative (and not just the board of directors) to avoid the appearance of any conflict of interest or self-dealing since members of the cooperative are the ones serving on the board of directors.
While paying a cooperative board of directors based on a percentage of the organization’s profits is unusual, compensating a board of directors is a useful tool for cooperatives. Some may decide to pay those members for their time as director, while other cooperatives may not and will put that money toward furthering the goals of the cooperative instead. And although the nature of cooperatives and their patronage principles can make this payment mechanism complicated, a cooperative can still find ways to pay directors for their time while honoring their member economic participation principles.